FAIR VALUE DISCLOSURES

6 Months Ended

Jun. 30, 2014

FAIR VALUE DISCLOSURES

The fair value for certain financial instruments is derived using a combination of market quotes, pricing models and other valuation techniques that involve significant management judgment. The price transparency of financial instruments is a key determinant of the degree of judgment involved in determining the fair value of the Company’s financial instruments.

Financial instruments for which actively quoted prices or pricing parameters are available and whose markets contain orderly transactions will generally have a higher degree of price transparency than financial instruments whose markets are inactive or consist of non-orderly trades. The Company evaluates several factors when determining if a market is inactive or when market transactions are not orderly. The carrying values of cash and cash equivalents, restricted cash, the Revolving Credit Facility, accounts payable and accrued liabilities are reasonable estimates of fair value because of the short-term maturities of these instruments. Fair values for other financial instruments are derived as follows:

Loans receivable: These instruments are presented in the accompanying condensed consolidated balance sheets at their amortized cost and not at fair value. The fair value of the loans receivable were estimated using an internal valuation model that considered the expected cash flows for the loans receivable, the underlying collateral value and other credit enhancements.

Preferred equity investments: These instruments are presented in the accompanying condensed consolidated balance sheets at their cost and not at fair value. The fair value of the preferred equity investments were estimated using an internal valuation model that considered the expected future cash flows for the preferred equity investment, the underlying collateral value and other credit enhancements.

Senior Notes: The fair values of the Senior Notes were determined using third-party market quotes derived from orderly trades.

Mortgage indebtedness: The fair values of the Company’s mortgage notes payable were estimated using a discounted cash flow analysis based on management’s estimates of current market interest rates for instruments with similar characteristics, including remaining loan term, loan-to-value ratio, type of collateral and other credit enhancements.

The following are the face values, carrying amounts and fair values of the Company’s financial instruments as of June 30, 2014 and December 31, 2013 whose carrying amounts do not approximate their fair value (in thousands):



	June 30, 2014						December 31, 2013
	Face Value ⁽¹⁾		Carrying Amount ⁽²⁾		Fair Value		Face Value ⁽¹⁾		Carrying Amount ⁽²⁾		Fair Value
Financial assets:
Loans receivable	$	209,971	$	210,866	$	209,187	$	176,558	$	177,509	$	176,985
Preferred equity investments	14,711		14,921		14,975		7,695		7,784		7,950
Financial liabilities:
Senior Notes	550,000		550,000		572,500		411,250		414,402		421,122
Mortgage indebtedness	125,400		125,400		108,943		141,328		141,328		130,622

⁽¹⁾ Face value represents amounts contractually due under the terms of the respective agreements.

⁽²⁾Carrying amounts represent the book value of financial instruments and include unamortized premiums (discounts).

The Company determined the fair value of financial instruments as of June 30, 2014 whose carrying amounts do not approximate their fair value with valuation methods utilizing the following types of inputs (in thousands):



			Fair Value Measurements Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Financial assets:
Loans receivable	$	209,187	$	—	$	—	$	209,187
Preferred equity investments	14,975		—		—		14,975
Financial liabilities:
Senior Notes	572,500		—		572,500		—
Mortgage indebtedness	108,943		—		—		108,943

Disclosure of the fair value of financial instruments is based on pertinent information available to the Company at the applicable dates and requires a significant amount of judgment. Despite increased capital market and credit market activity, transaction volume for certain financial instruments remains relatively low. This has made the estimation of fair values difficult and, therefore, both the actual results and the Company’s estimate of fair value at a future date could be materially different.

During the six months ended June 30, 2014, the Company recorded the following amounts measured at fair value (in thousands):



			Fair Value Measurements Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Recurring Basis:
Contingent consideration liability	$	4,500	$	—	$	—	$	4,500

The Company’s contingent consideration liability is the result of two acquisitions of real estate properties (see Note 3, “Recent Real Estate Acquisitions” for further details regarding the new contingent liability). In order to determine the fair value of the Company’s contingent consideration liability, the Company used significant inputs not observable in the market to estimate the liability, then developed probability-weighted scenarios of the potential future performance of the tenant and the resulting payout from these scenarios. As of June 30, 2014, the total contingent consideration liability was valued at $4.5 million. The following reconciliation provides the details of activity during the six months ended June 30, 2014 for financial instruments recorded at fair value using Level 3 inputs:



Balance as of December 31, 2013	$	7,500
New contingent liability	3,200
Decrease in contingent liability	(960		)
Payment of contingent liability	(5,240		)
Balance as of June 30, 2014	$	4,500

A corresponding amount equal to the decrease in contingent liability was included as other income on the accompanying condensed consolidated statements of income (loss) for the three and six months ended June 30, 2014.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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